How to save tax on your main home The Speechly Bircham guide Despite recent property market conditions, most homes have increased substantially in value. This has put a smile on the face of the taxman as well as homeowners as the long-term rise in property values has increased the Government’s inheritance tax (IHT) – and capital gains tax (CGT) – take. So are there any ways of shielding the value of our home from the taxman? Yes, most certainly. Wealth Protector We suggest the first step for married couples (and civil partners) is to put in place Speechly Bircham Wealth Protector wills, which save extra IHT on the survivor’s death. These are described in our Wealth Protector booklet. Saving tax on your home We’ve made tax-efﬁcient Speechly Bircham wills. We know how much tax they can save. But can we take any other steps now, in our lifetimes, to save IHT? In many cases, yes. This booklet shows you how. It describes how to save tax in your lifetime on your main home, and what traps to avoid. Giving your home to your children A popular way of trying to avoid IHT in your lifetime is to give all or part of your home to your children. The idea is that, if you survive the gift by seven years, it will be free of IHT on your death. Unfortunately this does not work. As you still live in the home, the gift is ineffective for IHT. It is called a gift ‘with reservation of benefit’, and you are treated for IHT as still owning the property. But this kind of gift is worse than ineffective. What you give away no longer qualifies for the principal private residence exemption from CGT. Usually when you sell your home there is no CGT to pay. But if you have given your home away, the exemption will generally be unavailable when it is sold. So there will be a large – and unnecessary – CGT bill. Nor is that all. Giving your home to your children jeopardises your security. After all, when your home is sold you may need the proceeds to fund your next home, your own lifestyle or long term care. But if you fall out with any of your children, they could withhold the proceeds or even force a sale against your will. And a child’s share could pass outside the family if he or she gets divorced, dies before you or gets into financial difficulties. So, giving any part of your home to your children is a bad idea. Giving your home to your children is a bad idea What other options are there? Selling your home to your children Instead of giving your home away, what about selling it to your children? Consider Mr and Mrs Smith who own The Pines worth £800,000. They decide to sell it to their children for £800,000. Subsequently they give the £800,000 cash to the children. Provided these steps are carefully structured and the Smiths survive the £800,000 cash gift by seven years, their gift should escape IHT. But there are still some major problems: • your children may not have enough cash to buy the property • your children will have to pay stamp duty land tax on the purchase • your children will not qualify for the main residence exemption, so when the property is sold, CGT will be payable if it has grown in value • your security will be at risk if any of your children falls out with you, gets divorced, is made bankrupt or dies. This option also has too many drawbacks. Paying a market rent Another approach involves giving all or part of your home to your children and paying rent. So long as you always pay a full market rent, your gift should be effective for IHT. But this approach also has several disadvantages: • you need to be sure you will have enough money to pay the market rent for the rest of your life – it could increase substantially over the years • as your children own the property but do not occupy it, CGT will be payable when it is sold if it has increased in value • your security may be at risk. The Rental Strategy Speechly Bircham have found a way round these problems. This is how it works… Mr and Mrs Thomson’s home is worth £1m. As they enjoy a good index-linked pension, they feel they can afford to give a half share of their home to their children – provided their own security is not jeopardised. A saving of over £450,000 after eight years Using the Speechly Bircham Rental Strategy, they each give a quarter share to a special Trust. This has the following benefits: • the Trust preserves the main residence exemption: as long as Mr or Mrs Thomson occupies their home as their main residence, there is no CGT to pay when the house is sold • the Thomsons’ security is protected: they can act as trustees and the Trust safeguards their right to live in their house (or a replacement property) for the rest of their lives • there is an extra IHT saving: paying rent is not a gift. So the rent the Thomsons pay falls out of the reckoning for IHT immediately: there is no sevenyear run off • income tax savings: whoever receives the rent must pay income tax on it. But the Trust is designed to allow the family to reclaim the tax where possible, for example by channelling the rent to non-taxpaying beneficiaries, such as the Thomsons’ grandchildren to pay school fees • there is no stamp duty land tax. This is what it saves… Suppose the Thomsons survive eight years and the house doubles in value during that time. Assume also that the rent is initially £20,000 and increases by 5% per annum. After eight years the IHT saving would be over £450,000. The next step If you would like to find out more about the Rental Strategy, just fill in the enclosed Asset Summary and send it to us at the address below. We will contact you to discuss how we can reduce your IHT bill. Initial meeting The cost of an initial meeting is £400 plus VAT. If you then ask us to implement the Rental Strategy – or to put in place Wealth Protector wills – the meeting fee is waived. Contact details: The Home Planning Team Speechly Bircham LLP 6 New Street Square London EC4A 3LX Tel: 020 7427 6400 [email protected] www.speechlys.com Speechly Bircham LLP 6 New Street Square London EC4A 3LX Tel +44 (0)20 7427 6400 Fax +44 (0)20 7427 6600 DX 54 Chancery Lane [email protected] www.speechlys.com Speechly Bircham LLP is a limited liability partnership registered in England and Wales (registered number OC321620) and is regulated by the Solicitors Regulation Authority. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. © Speechly Bircham LLP 2008